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Question
State with reason whether you agree or disagree with the following statement:
Many precautions are to be taken while estimating national income by income method.
Solution
Yes,we agree with the given statement that many precautions are to be taken while estimating national income by the income method. Precautions regarding the calculation of national Income by the income method are:
i. Transfer earnings, such as old age pensions, unemployment allowances etc. are excluded from the estimation of the national income. While estimating the national income, only earned income is included and unearned income in the form of transfer earnings is excluded.
ii. Income from illegal activities such as theft, gambling etc. should not be included in the estimation of national income.
iii. Income from the sale and purchase of second hand goods is not included in the national income. However, commission/ brokerage paid on the sale and purchase of second hand goods should be included in the national income estimation.
iv. Similarly, commission/ brokerage paid on the sale and purchase of shares and bonds should also be included in the national income.
v. Windfall gains such as lotteries and capital gains are unearned income and thus, are not included in the estimation of the national income.
vi. If profit as a whole is included in the national income estimation, any of the individual components of profits should not be included separately. Similarly, if the compensation of employees as a whole is included, any of the individual components of the compensation of employees should not be included separately.
vii. Duties such as gift tax, death duties, wealth tax etc. should not be included in the national income estimation in the current accounting year. This is because such duties are paid out of the tax payer’s past savings or wealth and hence, should not be included in the national income estimation in the current accounting year.
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